'Governments must do more' - Mario Draghi leaves with a parting shot to politicians
Mario Draghi bowed out yesterday, characteristically pleading for eurozone governments to boost fiscal support to match the European Central Bank's monetary stimulus.
The Italian economist - credited with saving the euro in his first months as ECB president - stepped down yesterday at a ceremony attended by political leaders including German chancellor Angela Merkel, French president Emmanuel Macron and Italian president Sergio Mattarella, as well as by incoming ECB president Christine Lagarde.
In a speech to mark the end of his eight-year term, Mr Draghi warned that the central bank would not be able to sustain growth without greater activity by governments, and called for a bigger shift to common budgeting across the single currency area.
For monetary policies like lower interest rates to work, there must be a corresponding effort to lift the real economy, he said.
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"We need a euro-area fiscal capacity of adequate size and design: large enough to stabilise the monetary union, but designed not to create excessive moral hazard," Mr Draghi said.
Low interest rates are no longer delivering the degree of stimulus that they did in the past.
"National policies cannot always guarantee the right fiscal stance for the euro area as a whole," he added.
The call echoed concerns that have been raised repeatedly by Mr Draghi almost since he took office, with little impact.
While the ECB has pushed for countries that can afford to spend to do so in order to lift demand, Germany has defied the call and has run budget surpluses for half a decade.
German chancellor Mrs Merkel's coalition government has balked at pooling financial resources with euro-area peers, fearing a political backlash at home among a public that is sceptical about the prudence of governments in southern Europe in particular.
The US put the financial crisis that has dominated his eight-year term behind it much faster than the 19-nation euro currency area, Mr Draghi said, in part because of fiscal measures and helped by a unified capital market.
"The US has had both a capital markets union and a counter-cyclical fiscal policy," he said. "The euro area had no capital markets union and a pro-cyclical fiscal policy."
Chancellor Merkel acknowledged Mr Draghi's message, without backing any specific actions that could follow.
"Monetary policy can do many things but not everything," she said.
"The ECB can't do the homework of governments that they themselves need to finish to strengthen their competitiveness."
France's Mr Macron went further, explicitly referencing Mr Draghi's legacy-defining statement of 2012, when he pledged to do "whatever it takes" to save the euro from its debt crisis.
"I can only salute the courage of the leader who knew, while respecting his mandate, how to call on member states to show ambition and go beyond our dogmas," Mr Macron said.
"It's now up to us, heads of state and government, to carry this 'whatever it takes' to measure up to your courage and your clear-sightedness."
In reality, European member states have no common agenda in terms of a common budget.
Moves toward a single capital market that could improve access to finance for businesses across the EU have been held back by the post-crash withdrawal of many banks to within their national borders, and by fears in wealthier countries of being caught with the costs of any future bank bailouts.
This month, European Union finance ministers agreed a limited common budget for the eurozone, but on a scale that will be too small to meet the level of impact advocated by the ECB.
In his exit speech, Mr Draghi admitted that coordinating fiscal policies within the currency union was an inherently complex process, but also warned that "uncoordinated policies are not enough, because the spillovers between countries from fiscal expansions are relatively low".
Meanwhile, incoming ECB president Ms Lagarde, who was the French economy minister when Mr Draghi took up the role, before she later moved to the IMF in Washington, pledged continuity in monetary policy, in what will be seen as a challenge to ECB board members who are unhappy about the latest round of stimulus measures which were unveiled by Mr Draghi last month.
However, Ms Lagarde also voiced support for a rethink of the ECB's current strategy.
"Economic relationships and trends shift - policy reactions that were appropriate two decades ago are no longer valid," she said.
Ms Lagarde concluded: "Only through continued research can we fully understand the contours of the problem and the ways in which we can address them, and propose new solutions."
Additional reporting Bloomberg
Mario’s key moments and decisions
November 1, 2011:
Mario Draghi takes over as ECB president from Jean-Claude Trichet.
November 3 and December 8, 2011:
The bank’s governing council cuts benchmark rates by 0.25pc at each of Mr Draghi’s first two meetings amid a eurozone debt crisis.
February 21, 2012:
Eurozone governments approve a second, €130bn bailout for Greece.
July 26, 2012:
Mr Draghi tells a conference in London: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
September 6, 2012:
Mr Draghi follows up by promising unlimited purchases of eurozone government bonds if countries face excessive borrowing costs. Market borrowing costs fall, taking pressure off Italy and other governments. The backstop calms markets and never needs to be used.
June 5, 2014:
The ECB cuts the rate on overnight deposits from banks to below zero for the first time ever, to minus 0.1pc.
August 22, 2014:
During a speech in Jackson Hole, Wyoming, Mr Draghi signals ECB could start to pump newly printed money into the economy through a bond-buying programme.
March 9, 2015:
The ECB starts purchasing bonds.
March 10, 2016:
The ECB cuts its main rates to new record lows: the deposit rate to minus 0.4pc and the lending rate to banks to zero.
December 31, 2018:
The bank ends its bond-buying stimulus programme after €2.6trn in purchases.
September 12, 2019:
Citing risks from trade disputes and low inflation, ECB board reverses course, deciding to restart bond purchases at a rate of €20bn per month, indefinitely, from November 1. It cuts the deposit rate to minus 0.5pc.
October 31, 2019:
Mr Draghi completes term, to be succeeded by former IMF head Christine Lagarde.